Insolvent? Chapter 7 Can Cancel your Crushing Debt and Get you to a Better, Brighter Tomorrow!
Credit-yogi.com understands that people sometimes find themselves at the point where they simply can’t get out of debt. They often face the daunting prospect of filing for bankruptcy.
This article explains how Chapter 7 can cure your insolvency and give you a debt-free fresh start.
Please understand that this article provides general information about Chapter 7 of the U.S. Bankruptcy Code (the “Code”). It does not (nor cannot) account for your specific circumstances. Also, each state modifies certain provisions of the Code. As a result, what you read here will generally but may not exactly apply to your specific situation. For these reasons, you really need to speak with an expert. That means consulting with someone who knows exactly how both the federal and state laws apply to your specific circumstances.
Credit-yogi.com wants to start you on the right track. So, we are offering you up to 4 NO COST, NO OBLIGATION phone consultations with bankruptcy attorneys who know the federal and your state’s laws. Our service representatives are available 24/7 to schedule your first, free phone consult. Call 1-866-964-9644. It’s your wisest and best next move!
- Why Chapter Seven?
- How does it help me?
- Is there a “downside”?
- What alternatives do I have?
- Chapter Seven: The ultimate cure!
- Chapter Seven Explained:
- All about your property
- All about your debts and discharge
- Chapter Seven and your business
- Final Thoughts
Why Chapter 7
Chapter 7 is the fastest, most simple, and least costly bankruptcy to solve your insolvency problem.
According to the Administrative Office of the U.S. Courts, nearly 800,000 bankruptcy petitions are filed each year. Chapter 7 accounts for 68% of these filings.
No one looks forward to filing bankruptcy. Yet, as the U.S. Courts have stated, “a fundamental goal of the federal bankruptcy laws … is to give debtors a financial “fresh start” from burdensome debts.” To achieve this, the U.S. Bankruptcy Code provides several key benefits and protections to alleviate your insolvency woes.
How does Chapter 7 help me?
It Immediately Stops Calls from Creditors and Debt Collectors:
- The court issues an “Automatic Stay” upon receipt of your bankruptcy petition. This prohibits all further attempts of creditors and collection agencies to try and collect on your debt.
- Foreclosures, repossessions, evictions, utility shutoff, and creditor lawsuits in process must stop. And creditors cannot initiate new ones.
- Wage/Income garnishments must cease, and new ones cannot be levied against you. However, alimony, family maintenance, and child support garnishments continue to be levied.
You can be debt-free within 4 to 6 months:
- This assumes the court approves your bankruptcy petition and “discharges” (cancels) your debts.
- Other types of bankruptcy filings require 3 to 5 years, or even longer to complete.
- you will no longer be insolvent
- This benefit applies to Individuals and Sole Proprietors. (Chapter 7 does NOT discharge the debts of Partnership and Corporate entity filers. See “Chapter 7 and your business” later in this article.)
You may keep your home, car, and much of your personal possessions in most cases.
- Notice we said, “you may keep”, not “you will keep.” There are limits, conditions, and restrictions on the amount of your value (equity) in this property to keep it. Fortunately, a bankruptcy attorney knows alternatives and “work-arounds” to these limits. In all likelihood, with the help of a bankruptcy attorney, you will keep your home, car, and personal possessions.
You will keep 100 % of your ERISA-qualified retirement accounts
- For example, the Code fully protects your Pension, 401(k), 403(b), 412(e), 457(b) plans, Employer-Sponsored SIMPLE IRAs and Employer-Sponsored SEP IRAs.
- In addition, you can keep your Traditional and Roth IRAs up to a combined total of $1,362, 800. The court-appointed bankruptcy trustee will take the excess over $1,362,800 to pay off creditors.
Chapter 7 is a measure of last resort?
The Downside of a Chapter 7 Bankruptcy:
Any bankruptcy will negatively impact your credit rating. But the impact of a Chapter 7 bankruptcy is more severe than for other forms of bankruptcy.
You DON’T get to keep everything!
- EVERY thing you own (other than ERISA-qualified retirement accounts), individually and jointly with your spouse, tangible and intangible, is included in your “bankruptcy estate.“
- Everything you have an expectancy in or an absolute right to own is also included
- All property in the bankruptcy estate is classified as either “exempt property” or “non-exempt property.”
- You get to keep your “exempt property” (e.g., home, car, household goods and personal property) within limits. Your equity in the property must not be greater than an “exemption amount.” If it is, it will be treated as “excess exempt property.” The exemption amount for property is specified in your state’s bankruptcy law.
- The court-appointed trustee will sell your “excess exempt property” and all your “non-exempt property.” The trustee will pay off your “unsecured debt” (e.g., credit card and personal loan) to the extent possible with the sale proceeds.
- Although Chapter 7 eliminates your responsibility for making further mortgage or car payments, it DOES NOT lift the lien. If you are delinquent on your payments, your property can still be foreclosed or repossessed.
And there are other unhappy consequences!
- The trustee will close or sell your business if you own one. (But you may be able to restart it under a new tax ID number.)
- The Chapter 7 bankruptcy will remain on your credit report for 10 years.
- During this period, you will be able to get credit, but it will be harder and more expensive to get.
- Similarly, secured (collateralized) loan agreements will be less favorable, and charge you higher interest.
- Unsecured loans and credit cards will charge you interest at or near the maximum rate allowed by the law in your state. (Secured credit cards operate like a debit card. What you can spend is equal to the amount you pre-pay the issuer.)
- You will have to disclose your bankruptcy for the rest of your working life in certain industries or “sensitive” positions. Likewise, for joining or participating in certain public programs.
All in all, it should be obvious. Yes, Chapter 7 is a fast, effective cure for your insolvency. But you should not pursue it until you have tried all other alternatives to square things with your creditors.
What alternatives to bankruptcy do I have?
Besides bankruptcy, often there are other ways to solve an insolvency dilemma. You likely have more options than you know about. Or you may have overlooked them. In either case, you need to explore them all and now is the time to do so.
Information, Tools, and Guidance
for each of these alternatives at:
Negotiate with your creditors!
Let your creditors know you want to pay what you owe them. But explain that it’s not possible because of your current situation: insolvency. So, you are calling hoping to work out some mutually agreeable repayment arrangement to make things right. Also make it clear that if you can’t, you will need to file for bankruptcy. In many cases, your creditors will work something out with you, for good reasons.
First, they will appreciate that you called them to address your debt.
Second, they know that if you file for bankruptcy, they will likely get nothing or only a fraction of what you owe them. So, whatever they can get from you under an “arrangement” will, in most cases, be much more than what they would get from the bankruptcy trustee.
Be sure to get any agreement with them in writing!
There are financing firms that specialize in consolidation loans.
And most offer “Bad Credit” debt consolidation loans as well.
But finding the right firm for you can be a challenge.
Credit-yogi.com can help you find the firm that’s right for you!
Let us help you:
- competitive bids from multiple financing firms
- get the best possible terms
Call us: 1-866-964-9644
Loan Consolidation and Consolidation Loans
If you’re writing four or more checks each month to pay your credit card and installment loans, you’re paying too much! And we’re not talking about the frequency or number of checks you’re writing. We’re talking about your cost for credit. Credit card debt typically charges significantly higher interest rates than other forms of legal debt.
You should consider consolidating all your debt, other than your mortage and auto loan, into one loan with a single, monthly payment. The consolidation loan is used to pay off all your credit card and personal loan debt.
There are several reasons why this can be prudent for you:
- First, it’s almost certain the interest rate on a consolidation loan will be significantly less than what you are now charged.
- These loans are offered with a choice of durations. They typically run from 2 to 7 years, as well as everything in between.
- Choice is a good thing! With these loans you can pick a reasonable monthly payment. Then the financing company will tell you how long it will take to pay off the loan. Alternatively, you can choose how long you want to pay, and they will tell you the required monthly payment.
- It’s easier to plan and budget for a single payment rather than deal with bills coming in throughout the month.
- Overall, loan consolidation makes a lot of sense. You get lower interest, one affordable monthly payment that is less than the multiple payments you are making now, and the peace of mind knowing the specific date the loan will be paid off. (Have you ever heard of someone outliving their credit card debt?)
It sounds good, yes? Well, it IS good. But there is one BIG CAVEAT we need to warn you about. This strategy only works if you don’t start accumulating credit card debt all over again.
Learn more about How Loan Consolidation Can Help You Get Out of Debt.
There are solutions even when your credit is not so good: Being Truly Objective When Seeking Loans for Bad Credit.
Credit Consolidation, Counseling, and Debt Management Firms
Getting debt under control is no easy challenge. It takes a lot of self-control and determination. Maybe you can do it on your own. Or maybe you want professional help.
Either way, Credit-yogi.com can help you. We have free, helpful information and “do-it-yourself” tools to get yourself out of debt, step-by-step. And if you don’t want to do it yourself, we’ll refer you to 4 appropriate, low-cost firms who will compete for your business. We’ll schedule your FREE, No-Obligation, phone consultations with these firms and you will get competitive bids from them. Which firm you choose to work with is entirely your decision.
How do you choose the “right” firm? What You Must Know About Debt Management Companies
Refinancing, Loan Modification and Bad Credit Loans
Debt problems or not, it always makes sense to explore the possibility of lowering the cost of your existing loans. That’s because interest rates and the economy are always changing. And refinancing at the right time could result in lower monthly loan payments.
However, there are several ways to go about refinancing or modifying your existing loans. Also, which firm you go to for refinancing makes all the difference in the world.
And if your credit rating is not the best, check out Bad Credit Auto Financing and Automobile Debt Help
Our consumer debt service help can assist you regardless of your credit status.
Our database has over 160,000 Financial and Legal Professionals who can provide refinancing and are licensed in over 30,000 zip codes.
We can arrange free, initial consultations and there is never any obligation to hire.
Call us: 1-866-964-9644
Strategies for Business Debts
Business insolvency creates complex problems. And Chapter 7 is rarely a satisfactory solution for a partnership or corporation, and its owner(s). (Chapter 11 is almost always the better approach.) So, what is the best solution? Resolve your business debt, if you can, without having to go through bankruptcy.
And how does a business do that?
Credit-yogi.com lays out effective strategies for businesses in Business Bankruptcy Advice – Survive and Thrive
Consider Chapter 13
Your insolvency may be better cured through a Chapter 13 bankruptcy. Chapter 13 is for individuals and Sole Proprietors. It is not available to Partnership and Corporate filers. (However, an owner of these entities who is personally liable for the business debt can file as an individual under Chapter 13 and include the business debt as their own.)
- Under Chapter 13 you keep all your property. But your home and car are still at risk of foreclosure and repossession if you are delinquent in your payments.
- You will NOT have to close your business.
- A court-appointed trustee will restructure and consolidate your debts into a 3-5 year ‘Repayment Plan.” The result will be a single monthly payment that is lower than the sum of your current monthly payments. Some of your unsecured debt may be discharged. You make your monthly payment to the trustee. The Trustee makes monthly distributions to your creditors.
One of the eligibility requirements for Chapter 13 is that you must prove to the court that you will have sufficient income to faithfully complete the monthly “Repayment Plan.”
Besides the benefit of being able to keep your property, Chapter 13’s consequences are much less severe than those for Chapter 7.
If you’re not eligible for, or cannot qualify for a Chapter 13 filing, then …
Chapter 7: the ultimate cure for insolvency!
When other options are not feasible, Chapter 7 is the solution to your insolvency woes. However, you need to understand what it does for you (and to you), and how it works.
So, let’s start with a grossly over-simplified, yet surprisingly accurate and comprehensive overview of Chapter 7…
Chapter 7 “In a Nutshell”
Chapter 7 is a “liquidation” plan, not a “repayment” plan. This means that once your eligibility is verified, a Court-appointed Trustee takes over all your stuff. The trustee can then sell everything that is not exempt (not protected) under your state’s law. Next, the Trustee uses the proceeds to pay off as much of your unsecured debt as possible. Last, the court will “discharge” (cancel) your remaining debt. With certain exceptions, you are now debt-free.
Our nutshell compressed 106 pages of the U.S. Code into six sentences. Obviously, we left out the details. As the adage cautions: “the devil is in the details“. And that’s exactly where we go next: into the details.
07:33 Interviewer: Is there any such thing as literally wiping the slate clean?
07:35 Gennady: Yes. For a good percentage of our clients they have mostly medical and credit card debt and say maybe some other debts here and there, and if they make under a certain amount depending on the state you live in and depending on how many dependents you have, you can discharge all your debt within a 3-1/2 month period, and you can basically get rid of everything you owe except, as I said, any kind of felony convictions or student loans. But everything else, medical debt, credit card debt, E and B surcharges, utilities, legal debt, attorney’s fees, accounts you owe money, pay day loans, bounced checks, overdraft fees—all of that stuff can be taken care of in a Chapter 7, and you won’t have to pay anything back, you just pay the legal fees for the attorney, filing fees, so on and so forth, and we can basically discharge all that debt.
Chapter 7 Explained
Am I eligible to file for Chapter 7?
Any Individual, Sole Proprietor, Partnership, Corporation, or other business entity is eligible to petition the Bankruptcy Court for debt relief. However, Chapter 11 is better suited to partnership and corporate filers in most cases. (See “Chapter 7 and Your Business” later in this article.)
- During the 180 days prior to filing the bankruptcy petition, you must NOT have had a prior bankruptcy petition dismissed due to:
- your willful failure to appear before the court, or
- failure to comply with court orders, or
- you voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
- Individual filers (including Sole Proprietors) MUST complete a credit counseling session, within 180 days before filing. The counseling session must be with a court-approved credit counseling agency, either in an individual or group briefing.
- You must file with the court any debt management plan developed during the counseling.
- Your “current monthly income” must not exceed:
- your state’s median income, or
- an amount allowed under the Code’s “Means Test.” The Means Test includes your average monthly income from all sources over the last 6 months. (However, you can exclude Social Security benefits or payments you received as a crime victim.) Your average monthly income is then reduced by an amount allowed for reasonable, allowed living expenses. Each state determines what are reasonable, allowable living expenses. If your average monthly income is equal to or less than your allowed living expenses plus a small “buffer” amount, you satisfy the Means Test. On the other hand, if your average monthly income is greater than your allowed living expense plus a small “buffer” amount, you cannot file under Chapter 7. But you may qualify to file under Chapter 13.
Frequently Asked Questions About Chapter 7 ELIGIBILITY
Is there a minimum or maximum amount of debt requirement?
No! Any amount of debt can be the subject of a Chapter 7 bankruptcy.
Why is there a limit on the amount of my income to file for Chapter 7?
You must prove to the court’s satisfaction, that you truly don’t have enough income to pay off your creditors. And that is why you are petitioning (asking) the Court to discharge your debts.
On the other hand, if your income exceeds the allowable limit, it means you can repay your debts. As a result, the court will deny your bankruptcy petition. Accordingly, the court will NOT discharge your debts. In that case you will need to pursue the options previously discussed in the “Alternatives to Bankruptcy” section above. Or you may choose to file under Chapter 13.
How do I find a court-approved credit counseling agency?
The easiest and smartest way to find a court-approved firm is to call Credit-yogi.com: 1-866-964-9644. Our Service Representatives will schedule you for up to 4 FREE, NO OBLIGATION phone consultations with court-approved firms in your state. And each firm will provide you with a competitive bid for your required counseling.
Alternatively, if you want to do the work yourself, the U.S. Courts maintains a site where you can find a court-approved credit counseling firm.
What income does the current average income test include?
You must report 100% of ALL your income, regardless of where it comes, on a schedule included in your filing. This also includes income you have an absolute right to receive within 180 days of your filing. However, you can exclude Social Security benefits. Also, you can exclude amounts received as a victim of certain crimes. But if you fail to include a source of income, or understate an amount of income, the court will treat the omission as fraud. Unless you can prove otherwise, the court will deny your petition and may apply severe penalties.
All about your property
What do I get to keep?
The short answer is that you may keep your “exempt” property and you may lose your “non-exempt” property. But what does that mean? To answer this question, you first need to know what is the “Bankruptcy Estate.”
The Bankruptcy Estate
A Chapter 7 petition must be accompanied by various forms and documentation. One of these forms is the property schedule on which you list EVERY thing that you own. We cannot overstate how critical it is that you are truthful and thorough when completing this and all other required forms. Inconsistencies or omitting property will raise suspicions of fraud and abuse of the law. If true, your petition will be denied. In addition, you could face severe and possibly criminal penalties.
09:11 Interviewer: Oh, okay. So you can lose control if measures are not taken to have them protected?
09:19 Gennady: If you’re not honest with our law firm and don’t tell us about all your assets, there is a risk of that. My recommendation is for clients to be honest with us because we are on their side. We will work around that situation if we are properly informed. If we are not aware of the assets, that’s when people get in trouble. They have to be honest with their attorney. It is important to choose a bankruptcy attorney they can trust. If you are not honest with us, and we are not aware of an asset, and we don’t list it to protect it on one of the schedules in the bankruptcy petition, then you are at risk of losing it if we don’t amend it at the time. But if you are honest with our law firm, and you tell us all your assets, we will make sure to protect your assets that need to be protected.
What’s does the bankruptcy estate include?
- ALL real, tangible, and intangible property you own, directly or indirectly, individually, or jointly with your spouse, AND
- If you own a business, the appraised market value of your ownership interest in the business, AND
- Anything and everything you have an absolute right to receive within 180 days of filing for Chapter 7, AND
- ANY property you sold or transferred out of your name within two years (or your state’s time for settlement of fraud transfers, if longer), prior to filing bankruptcy, if:
- you sold or transferred the property, while you were insolvent, for less than its fair market value, OR
- the sale or transfer of the property is an attempt to hide it or in whatever fashion, to cheat or diminish the value your creditors would realize in the event of your bankruptcy, OR
- you deliberately harmed or damaged the property to reduce its value in bankruptcy or in the hands of a lienholder, OR
- you intended to commit fraud or abuse the bankruptcy law
- You CAN sell property to pay bills or pay for the basic necessities of life (food, rent, warm clothing, medicine).
- Typically, the trustee will not try to recover transferred property in which you have no equity, or property you could fully exempt under the bankruptcy law.
- There is no time limit with fraudulent transfers. Also, fraud will result in denial of your bankruptcy petition and criminal penalties will likely be imposed.
- If you sold or transferred any property within the last 2 years you are strongly advised to discuss the implications with a bankruptcy attorney.
What does it exclude?
- The Code excludes 100% of your ERISA-qualified plans such as 401(k), 403(b), 412(e), and 457(b), AND
- 100% of your employer-sponsored SIMPLE and SEP IRAs, AND
- $1,362,800 in total for all your Traditional and Roth IRAs. The trustee will take any excess value in your IRAs to pay your unsecured debts.
NOTE: federal law does NOT exclude any portion of NON-spouse inherited IRAs.
- The federal code also excludes your right to distributions from a Spendthrift Trust
- Most state courts also exclude Social Security benefits.
Federal law uniformly protects excluded property. This means it’s beyond the reach of creditors, and even state laws cannot infringe on this.
All non-excluded property (which is everything else you own or have a right to own) is in the bankruptcy estate. The court-appointed trustee takes legal possession and control of everything in the bankruptcy estate.
What about my home, my car, my personal stuff? “Exempt” Property”!
The U.S. Bankruptcy Code empowers the court-appointed trustee to gather your property in the bankruptcy estate, sell it, and pay off your unsecured debt. However, the Code does not empower the trustee to leave you destitute. So, as explained above, you keep your income. You also keep your ERISA-qualified retirement accounts.
In addition, the Code also recognizes that certain types of property may be essential to your financial and emotional recovery. Since the purpose of the bankruptcy law is to position you for a fresh start, the courts do not want to strip you of everything you own. Therefore, you can ask the court to exempt (remove) these properties from the bankruptcy estate. The court will approve your request unless your creditors file a compelling objection.
Your state of primary residence determines which types of property are eligible for exemption and the amount you can exempt. In addition, the federal Code also exempts certain property types as well as limits on your value in them. However, you MUST use your state’s schedule of exemptions unless your state law allows use of the federal schedule.
Twenty states give you a choice!
As of August 2021, 20 states permit filers to use either the state’s exemptions OR the federal exemptions. But you cannot “mix and match.” This means that whichever schedule you choose to use, it must be used for all exempt property. Furthermore, making the right choice for you is NOT as simple as you may think. Many filers “shoot themselves in the foot” when making this decision. This is why Credit-yogi.com believes it’s in your best interest to work with a local bankruptcy attorney. They know your state’s law as well as federal law. More important, the bankruptcy attorney knows how this choice will affect your case overall. That means, based on their experience, they will know which the best exempt property schedule is to use in your case.
A sample of federal property exemptions
We will use the federal exemption schedule in the examples below.
- The federal Code and most state laws update the exemption amounts every 3 years to adjust for inflation. The next update occurs on April 1, 2022.
- You can double the federal exemption amount IF your spouse joins your bankruptcy filing. However, your spouse’s credit report will also reflect the bankruptcy for 10 years.
Exemption Amount Vs Your Actual Value (equity)
- The exemption amount is the maximum value (equity) you can have in a property you want to exempt. You need to compare your actual value in the property to the exemption amount. But first, you need to calculate your “actual value”(your equity) for each individual item of property you wish to exempt. Here’s how:
- Market Value of the property
- minus the amount of any unpaid (secured) loans. (e.g., mortgage, home equity loan, auto loan, boat loan) that have a lien against the property,
- equals your value in the property
- The court WILL approve the exemption and remove the property from the bankruptcy estate IF your actual value in the property is equal to or less than the exemption amount
- On the other hand, the court will NOT grant the exemption if your actual value in the property is greater than the exemption amount. In that case, the trustee will sell the property. The trustee will reimburse you an amount equal to the exemption amount. However, you may be able to “buy” the property from the trustee by paying the difference between your actual value in the property and the exemption amount. Alternatively, you could convert your case into a Chapter 13 filing if you qualify. Learn about Chapter 13 and see if you qualify.
Here are the more important property types listed in the federal schedule. Also, most states exempt this property as well, either explicitly or through some alternative provision.
The Federal Exemption Schedule
|Property Type||Individual Exemption Amount||Joint w/Spouse Exemption Amount|
applies to your primary residence only
applies to your primary vehicle only
|Household Goods & Personal Property||$625 per individual item, $13,400 in total for all items in this category||$1,250 per item, $26,800 in total|
can be used to protect non-exempt property or to increase the exemption amount for an exempt property
|$1,325 PLUS up to $12,575 of unused Homestead exemption||$2,650 PLUS up to $25,150 of unused Homestead exemption|
So, I can keep my home if my equity is less than the exemption amount, right?
Well … the answer is a definite “it depends!”
Mortgages are “secured debt.” Your home is collateral for the mortgage loan. As such, the mortgage company has placed a lien on your home. This means if you fail to make your mortgage payments, the creditor can foreclose (seize) your home and sell it to recover what you owe them. This is also true for any type of loan where the loan maker has a lien on your property, securing them in the event of your default. Typical examples of secured debt include mortgages, home equity loans, car loans, boat loans, vacation home loans, home equity loan, etc… Therefore, this discussion applies to any type of property that is collateral for a secured loan.
So, to answer the question above…
If your equity in your home is equal to or less than the exemption amount, your home will be exempt. Your home is out of the bankruptcy estate, and the trustee cannot sell it. Even better, the court will discharge your mortgage debt. This means you have no legal obligation to repay your mortgage, and no one can make you do so.
HOWEVER, Chapter 7 does NOT lift the liens on your home, car, or any other property securing a loan.
So, if you are current with your mortgage payments, your home continues to be yours to keep.
BUT, if you are delinquent on your mortgage or home equity loan repayments, the lienholder WILL foreclose, and you will lose your home. Recognize, however, that the lienholder (bank, mortgage company or auto loan financier if your car is exempt) would rather have repayment rather than the property. Since your other debts will be discharged, the lienholder may now be willing to negotiate a new repayment plan with you. Usually, this is better for all, rather than foreclosure or repossession of the property. In this case, you will file a “Reaffirmation Agreement” with the bankruptcy court. This agreement between you and the lienholder means that you are “Reaffirming” this debt and your commitment to repay it. It also instructs the court to NOT discharge this debt. The also applies for any type of property that secures a loan.
What do I lose? Non-Exempt property!
Your non-exempt property is whatever remains in the bankruptcy estate after removal of the exempt property. Technically, you forfeit all your non-exempt property. The trustee will sell this property. Then the trustee will pay off as much of your unsecured debt as possible with the sale proceeds.
How does the trustee sell the property?
The trustee must try to sell your property at the best price. But the trustee also needs to sell it within a reasonable amount of time. Therefore, the trustee will use different methods for each type of property in the bankruptcy estate.
For example, the trustee will place a highly marketable house and real estate with a broker. Whereas he or she may auction an abandoned, run-down home. Valuable jewelry, artwork, and collectibles will go to an auction house specializing in those articles.
Also, the trustee may sell a car or boat at a public auction site that specializes in those items. However, if the car or boat is a high value item, the trustee will place it with a specialty broker dealing in those items. The trustee may even sell other, smaller property items in “lots” through an internet auction market. In summary, the trustee will use whatever court-approved methods will get the best price in the shortest time.
What happens to property that doesn’t sell? ” Trustee-Abandoned Property”
Some property is not marketable. It won’t sell and the trustee is not going to waste time trying to do so. In that case, the trustee will “abandon” the property and it will remain yours. But there’s more!
Earlier we said that the trustee will sell it your “excess exempt property” and pay you the exemption amount. Well, that’s not just a courtesy. The law requires the trustee to pay you the exemption amount before anyone else gets the proceeds. This may influence the trustee to not sell an exempt property. Why?
The answer is “profit”, or more accurately: the lack of it!
The trustee’s sole purpose in selling an item of your property is to raise cash to pay to your unsecured creditors. And that can only happen if the trustee sells the property for a net profit. The trustee pays all fees, commissions, and any taxes from the sales proceeds. In addition, the trustee must pay off any loans (e.g., mortgage, auto loan, boat loan, etc.) secured by the property. Last, but not least, if its “excess exempt property” to be sold, the trustee must pay you your exemption amount. The result is that in many cases, the trustee determines there won’t be any net profit. Or there will not be enough to be worth the effort. In either case, the trustee may abandon the property. Which means you keep it!
What is the “Meeting of the Creditors?”
The Code requires you to attend a Meeting of the Creditors. (This meeting is also known as a “341 Meeting” named for the section of the Code that requires it.) Typically, this meeting will occur 30 days after the filing of your bankruptcy petition.
The purpose of this meeting is twofold:
- To verify the accuracy and completeness of the information you provided in your filing with the court – especially regarding your property and income
- To prove your identity and screen out a fraudulent filing
You will be under oath during this meeting. The trustee will ask you questions. Creditors may also ask you questions. Typically, the meeting lasts an hour or less. And creditors rarely show up. If they do, they usually have only 10 minutes each, to question you. They probably want to know more about a particular item of property. Or they may want to know why you made a certain purchase or took a certain action just prior to filing. A creditor’s presence is usually a sign that they are considering filing an objection to a property exemption or a discharge of your debt. Your bankruptcy attorney will prepare you and attend this meeting with you.
A Key Strategic Play
A bankruptcy attorney knows how to use the “Wildcard Exemption” (if your state allows one) to make the sale of a property less profitable for the trustee. That may cause the trustee to abandon rather than sell the property. In which case, you keep the property. In addition, the opportunities are even greater if your state allows you to choose between the federal and state exempt property schedules. But employing this strategy requires much more than good math skills. It requires expertise in the bankruptcy laws. And, most important of all, practical experience. An experienced bankruptcy attorney knows whether a trustee will sell or abandon property under various circumstances. Therefore, it’s to your advantage to hire a bankruptcy attorney.
Give yourself every advantage!
Let Credit-yoci.com schedule you for up to 4 FREE, NO OBLIGATION phone consultations. We’ll connect you with bankruptcy attorneys in your locale. Our Service Representative are available 24/7 to schedule your first phone consultation. Call us! 1-866-964-9644
Frequently Asked Questions About My Property
Why do I have to give up any of my property to the bankruptcy trustee?
The legal purpose of Chapter 7 is to give you a fresh start. The court will do this by “discharging” (cancelling) almost all your debts. (We will discuss the exceptions in the next section of this article.) However, the court is obligated, by law, to treat your creditors fairly. That means the court must try to reduce their losses as much as possible. Unfortunately, there’s only one practical way that can happen. The trustee must sell your property.
Why are there limits on the type and amount of property that is exempt?
As part of your fresh start, the law wants you to keep as much of your property as you need to get back on your feet. In other words, the law wants you to keep the essentials and necessities for your success. This is what determines the “exempt” property.
On the other hand, the law has no interest in protecting your “niceties” and certainly not any of your luxuries. This property falls into the “non-exempt” category.
However, how property gets classified and who determines it could create a huge problem. What one person sees as a necessity; another person sees as a luxury. And that would lead to chaos. Debtors would suffer arbitrary, unequal treatment in the settlement of their cases.
Therefore, it’s to everyone’s benefit that the law of your state includes a uniform schedule of exempt property and limits. It takes the classification decision out of individuals’ hands.
Yes, you can keep your 6 Timex watches. But the Rolex is history. Of course, you should be able to keep your car. Going to and from work or go grocery shopping is essential to your daily life. But driving a Rolls Royce to do those things is, by any measure, a luxury.
How do I know if my state allows me the choice of the state or federal exemption schedule?
Unless your state explicitly allows you to choose between the state and federal schedules, you MUST use your state’s schedule.
As of August 2021, the following states allow this choice. Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.
In all other states, you must use the state’s exempt property schedule.
What property do I get to keep?
- 100% of the account balances in your ERISA-qualified retirement plans
- 100% of your employer-sponsored SIMPLE and SEP IRA plans.
- Up to $1,362,800 for all your Traditional and Roth IRAs combined
- 100% of your share in a Spendthrift Trust
- Any property specifically listed on the exempt property schedule, up to the limit specified on the schedule.
- In most states, the limit is doubled if your spouse joins the bankruptcy filing with you.
- The “Wildcard Exemption” allows you to protect up to a certain amount of ANY type of property, even if it’s not listed in the exempt property schedule. Or you can use the Wildcard exemption to increase the exemption limit on any property listed in the exempt property schedule.
- HOWEVER, secured debt creditors can foreclose or repossess the exempt property securing your debt if you are delinquent in your loan repayments.
- Any property that the trustee believes will not generate a profit if sold, will be released back to you.
What property will I lose?
Technically, you stand to lose all your property that is not fully exempted.
However, as a matter of practicality, any of your non-exempt property that has little or no marketable value will likely be abandoned by the trustee and released back to you.
If your value (equity) in an exempt property exceeds the exemption amount, the trustee can sell that property. However, you will be reimbursed an amount equal to the exemption amount.
What happens if I missed a property item that I should have disclosed?
Immediately bring this oversight to your attorney’s attention. The bankruptcy trustee will suspect that failure to disclose property is a fraudulent act or an attempt to hide assets.
DO NOT to fail to disclose any item of income or property in your bankruptcy filing. You risk denial of your bankruptcy petition and possible criminal penalties.
What is a “No Asset” Bankruptcy?
A “No Asset Bankruptcy” occurs when there are no assets in the bankruptcy estate. This is the result when the debtor can protect all their property through exemptions and the non-exempt property has little or no marketable value. As a result, there is nothing for the trustee to sell. It also means the creditors will receive nothing and don’t need to file a claim with the court. In fact, most Chapter 7 cases are a No Asset Bankruptcy.
All about your debts and their discharge
Which of my debts will get paid from sale proceeds?
Secured creditors/secured debt will NOT be paid off in cash by the trustee. The reason is these creditors have a powerful debt recovery tool that other creditors do not have: a lien. Chapter 7 does not “lift the lien” on property. At the close of the bankruptcy proceedings, the secured creditor is “paid” by allowing the creditor to take the property back. This results in foreclosing on the mortgage or repossessing whatever property is securing the loan. In most cases, they will recover most if not all the unpaid loan balance. These creditors have the least risk in the bankruptcy process.
The most common example is your mortgage. A mortgage loan places a lien on your home. If you don’t make your mortgage payments, the mortgagor can foreclose and sell your home to recover most, if not all the unpaid balance of your mortgage. So, if you want to keep your home after bankruptcy, you need to stay current on your mortgage payments. Also, you will have to negotiate a Reaffirmation Agreement with the creditor and file it with the court. This Agreement commits you to paying off the creditor according to the terms you negotiated and stated in the agreement. IT also instructs the court to NOT discharge your debt with that creditor.
There are two types of unsecured debt: Priority and Non-priority unsecured debt. Neither type will receive any payments unless the trustee is able to sell assets of the debtor and raise cash.
Priority Unsecured Debts will be paid first. These are not loans. They are legal monetary obligations. The more common forms of this type of debt are:
- Alimony, Child Support and Family Maintenance obligations
- Unpaid income taxes that came due during the three years prior to filing for bankruptcy
- Claims for death or personal injury caused by driving under the influence of alcohol or drugs.
- For business filers:
- wages, salaries, and commissions owed to employees within 180 days prior to the bankruptcy filing
- contributions owed to employee benefit plans within 180 days prior to bankruptcy filing
Non-Priority Unsecured Debt includes consumer debt (credit cards and personal loans) and medical bills. These creditors will not be paid anything unless all the Priority Debts are paid in full. These creditors will be lucky to get anything from the trustee. In most cases they will get nothing since most Chapter 7 bankruptcies are “No Asset” cases. If the trustee has nothing to sell, there is nothing to distribute to these creditors.
Which of my debts will NOT get paid?
If yours is a No Asset Bankruptcy, no debts will be paid off. That’s because the trustee has nothing it can sell to raise cash. If there is only enough cash to pay off Priority Unsecured Debt, the Non-Priority Unsecured creditors will get nothing. Student loan debt will not be paid off.
Also, the trustee cannot pay any debt that is not listed in the schedule of creditors filed at the inception of your case. It is critical that your filing include EVERY one of your creditors
Whether or not you continue to be liable for any debt after conclusion of your case depends on whether the debt is “dischargeable.” Other factors may also affect your post-bankruptcy liability.
What does a discharge of my debt mean?
The following subsections discussing the discharge of debt applies only to individual filers and sole proprietors.
The debts of partnerships and corporations filing as an entity WILL NOT BE DISCHARGED. (See the section below titled “Chapter 7 and your business.”)
A “discharge order” is a court decree that your debt is now cancelled. That means you have no legal obligation to repay the discharged debts. In addition, creditors are prohibited from trying to collect payment from you.
BUT the cancellation of your debts does not “lift” the lien on your secured property.
60 days after your Meeting with Creditors, the court will issue a “discharge order,” unless there are complications. Complications are usually an objection or requested a delay of discharge filed by a creditor. Typically, the court only hears narrowly defined objections such as fraud, failure to disclose property or income, and harm or destruction of property.
HOWEVER, individuals, and sole proprietors are required to complete an approved debtor education course within 60 days after your Meeting of the Creditors. Otherwise, the court will not issue the discharge order (unless an exception is granted). (Hint: The course is only 2 hours. Take it!) You can only take the course from a provider that has been approved by the U.S. Trustee Program.
How do I find an approved provider? You guessed it! Credit-yogi.com 1-866-964-9644. Or you can research an approved provider on the U.S. Department of Justice website.
Which of my debts will be discharged?
There is an extensive list of debts that the court can discharge. However, a dischargeable debt will NOT be discharged if you committed fraud, willfully failed to disclose property or income, or attempted to hide or harm property.
Typical debts that will be discharged include:
- credit card balances, personal loans, revolving charge accounts, and other consumer debts
- unpaid medical bills, past due rent, and past due utility bills
- business debts of an individual or sole proprietor
- income taxes and penalties 3 or more years overdue, real estate taxes more than 1 year overdue
- auto accident claims (but not those due to alcohol or drugs)
- civil court judgements (unless based on fraud)
- attorney fees (but not for alimony or child support)
But you may forfeit the discharge of your debts if any of the following apply.
A creditor, bankruptcy trustee, or the U.S. trustee can request the complete dismissal of your case. If the court agrees, it can deny your entire case for any of the following reasons. In that case, you are liable for all your debts without protection of the bankruptcy laws.
- Failure to comply with the rules, orders, or requirements of the court
- You did not produce requested records, hid, or destroyed them
- Failure to complete the required credit counseling or debtor education courses
- You transferred, hid, or attempted to hide property, or cannot account for lost assets
- At any time during your case, you lied under oath or committed fraud in any manner
- You previously filed for bankruptcy and recently received a discharge of your debts. “Recently” depends on the bankruptcy chapter you previously filed. It can range from 2 to 8 years.
In addition, creditors can ask the court to not discharge any of the following:
- purchases of “luxury” items totaling $725 or more, within 90 days of filing for bankruptcy (the court will presume this as fraudulent debt)
- debts based on fraudulent or false pretense application (false statement of income on credit card or loan applications)
- cash damages owed to someone you willfully injured
- cash advances received within 70 days of filing for bankruptcy
Which of my debts will NOT be discharged?
There is an extensive list of debts that the court will not discharge. For most of these, to do so, could encourage behavior that is contrary to the public good. For others, it’s just a matter of public policy. Here are the more common of these. Your bankruptcy attorney knows which of your debts cannot be discharged.
- debts you incur after your bankruptcy petition is filed
- debts not listed on the Schedule of Creditors files with the court
- alimony and child support debts
- student loans
- condominium and cooperative housing fees and homeowner association fees
- income taxes and penalties less than 3 years in arrears, real estate taxes less than 1 year in arrears
- debts for personal injury for driving while intoxicated
- unpaid government fines and penalties
- unpaid court fines, penalties, and restitution for a criminal activity
WATCH OUT FOR THIS UNEXPECTED, UNWELCOME SURPRISE: Co-signors and guarantors of a discharged debt remain liable for the discharged debt!
You filed for Chapter 7 and the court discharged all your debts. The discharge included a $10,000 loan you used to pay for a family cruise to Bermuda. Your credit was not so good, so, your brother-in-law graciously agreed to co-sign the loan. SURPRISE!!! Although you are no longer responsible for this loan, your brother-in-law is. The creditor can and will sue him for repayment of your loan.
Frequently Asked Questions About Debts and Discharge
Do I have to appear in court?
In most cases, no! Debtors do not have to appear in court unless some problem or challenge arises. Then the judge may want to hear you, under oath, answer unexpected questions. Otherwise, your case will be handled almost entirely by the court’s administrative staff. However, you MUST attend the Meeting of Creditors.
Is my mortgage discharged or not?
Your personal liability to repay your mortgage is discharged. You no longer have a legal obligation to make your mortgage payments. But the courts discharge does NOT lift the lien on your home. At the conclusion of your case, the mortgage company can foreclose on your home if you are not current on your payments.
If I am not current on my mortgage payments, is there a way for me to keep my home?
Probably! The mortgage company really doesn’t want your home. They want you to repay your mortgage. You need to act immediately after the Meeting of Creditors. Contact the mortgage company and ask to negotiate a plan to pay off your mortgage. Since the court will cancel your other debts, you should have sufficient income to pay the mortgage. You may even be able to lower your monthly mortgage payments by extending its term. From a practical, economic perspective, this is a win for you and the mortgage company. In many cases, the mortgage company will be willing to work with you.
However, you need to file a “Reaffirmation Agreement” with the court, prior to the court’s issue of a discharge order. This agreement states your commitment to fulfill your obligation to the mortgage company. It is also your instruction to the court to NOT discharge your mortgage debt.
Why won’t the trustee pay off my secured debt?
The creditor that gave you a secured loan (e.g., mortgage, auto loan) placed a lien on the property as a condition of the loan. The secured creditor can take back the property (foreclose on your home, repossess your car) if you don’t make your payments. The lienholder can then sell the property to recover the unpaid balance of the loan. Therefore, there is no need for the trustee to pay off your secured debt.
If I truly forgot an item of property or unintentionally misstated information, will I really be subject to fraud or denial of my case?
According to the “letter of the law,” YES! The sad fact is that people do try to hide property, or the existence of a certain debt or understate their income. Any party to the bankruptcy process – creditors, case trustee, U.S. Trustee – can request a denial of your case based on suspicious or fraudulent activity.
However, many, if not most courts, will hear your explanation that it was an innocent mistake. Especially if you are the one to bring it the attention of the court. If the item in question would NOT affect the case outcome in any meaningful way and becomes known before the court issues a discharge order, the court may accept your explanation.
You failed to disclose your beach house in Malibu. Your future wardrobe is likely to consist entirely of orange jump suits.
On the other hand:
You failed to disclose your collection of walnut shells that, you believe, resemble the faces of former presidents. (Can we get a picture, please?) Likely, the court will give you a “pass.”
How soon will the court discharge my debts?
Unless there are objections or a court authorized delay, the discharge will be issued 60 days after the date of the first Meeting of Creditors. If there are no issues with what you state in your filing, the entire Chapter 7 process, for the debtor takes 4 months, approximately.
What if, after the 60-day period, the trustee hasn’t sold my property?
Even if the property has not yet sold, the court will still issue the discharge order at the end of the 60 days period, unless there are objections or court authorized delays. This is because, you no longer have an interest in the property. Some properties, like real estate, may take as long as a year to close. The law wants you back on your feet as soon as possible. If your property has not sold by the time the discharge is issued, you are obliged to cooperate with the trustee until it does sell.
What does the discharge order say and do?
The discharge order is the court’s decree that you are no longer liable for your debt brought before the court. A copy of the decree is automatically sent to all creditors, you and your attorney and the U.S. and bankruptcy trustees. It also includes a notice to creditors that they are, by law, prohibited from contacting you in any attempt to try and collect on the discharged debt. If they do, they will be held in civil contempt of the court and subject to fines.
Note, however, the discharge does not lift the lien on your secured property. The lienholder is free to foreclose or repossess at the time the discharge is issued.
Chapter 7 and your business insolvency
A sole proprietorship is NOT a distinct, legal entity under the law. Rather, it is an individual who chooses to do business under a trade name. The sole proprietorship’s debts are, legally, the personal responsibility of its owner. If the business debts become overwhelming, its owner can file under Chapter 7, as an individual and include the business debt as his/her own. Nothing in this article differs if the debtor operates sole proprietorship.
Partnerships, Corporations, and LLCs
Businesses, other than sole proprietorships, ARE distinct legal entities. This means that these businesses are legally separate from their owners. The business can file for bankruptcy for itself without affecting the credit or assets of its owners theoretically.
Chapter 7 seldom makes sense to solve a business entity’s insolvency.
There are several reasons for this:
- The trustee takes over the business and sells all the assets. Chapter 7 is a way to go out of business, not stay in business.
- The court does NOT discharge unpaid debts. This is because the business is closed. The business no longer exists. However, creditors will pursue every legal means to collect the debt from the personal assets of the business owners. The creditors will easily succeed if the owners co-signed or guaranteed loans for the business. For all other unpaid corporate debts, the creditors will claim the owner mismanaged the business into bankruptcy or committed some fraudulent acts. If true, the owner may very well be liable for the debt. Regardless of whether owners are justly liable, it will cost a lot of money to defend themselves.
- The debts of any form of partnership are not discharged. If the business is a general partnership or limited partnership, its owners are personally liable for the partnership’s unpaid debt. If the business is a Limited Liability Partnership, state law determines whether its partners are liable.
For all the above reasons and more, filing under Chapter 11 or 13 is much more advantageous for any type of partnership and corporation. Chapter 13 is an easier, faster, and less expensive process than Chapter 11. However, business entities cannot file for Chapter 13. But, if the business owners are going to be liable for the business debt anyway, they can file as individuals under Chapter 13 and include the business debt.
Does it ever make sense for a business entity to file under Chapter 7?
Sometimes the business owner(s) expect there will be hostile challenges or claims from an ex-spouse, or former co-owner of the business, or from a creditor owed a large debt.
Chapter 7 is a transparent process. A case trustee will take possession of the bankruptcy estate property once the bankruptcy petition is filed with the court. At that point, the trustee is responsible for the property and its liquidation. The owner is out of the picture. This reduces the owner’s exposure to potential claims of mishandling or fraud in connection with the liquidation of the property.
What will it cost me?
Chapter 7 is the least costly type of bankruptcy to cure your insolvency woes. You will incur court fees, administrative fees, and attorney fees. Typically, these will total between $1,000 and $2,000 depending on how many creditors you owe.
How can I pay these costs if I’m broke?
The U.S. Courts and many attorneys offer payment plans. Also, there are organizations that may help you with your legal fees. Find out more at What IF I Can’t Pay for My Bankruptcy Costs?
Do I really need to hire an attorney?
Can’t I file for Chapter 7 myself?
Yes, you CAN file for Chapter 7 yourself. (It’s called filing “Pro Se.”) Know what else? You can mow the lawn with your teeth, too! However, we have it on particularly good authority that once you start either of these, you will quickly find the process equally “distasteful.”
You don’t want just a good outcome from your case. You want the best possible outcome. How successful your case is, can be measured in two ways. How much of your debt gets cancelled? And how much of your property do you keep? Sure, you can file yourself, follow all the rules and procedures and get a good result at the end. But it’s almost certain the result will not be as good as it could be. You see, the best possible result comes only partly from knowing the law, rules, and procedures. Just as important, if not more, is experience. A local bankruptcy attorney knows the bankruptcy court that will hear your case. The attorney’s “insider’s” guidance, insights, and recommendations are worth more in terms of better results than what you think you save by filing yourself.
But don’t take our word for it. Here’s what the U.S. Courts has to say about why you should hire a bankruptcy attorney.
How do I find the “right” attorney for me?
GREAT question! Credit-yogi.com explains why and how to hire the “right” kind of attorney to handle your case. Credit-yogi.com will put you in touch with up to four bankruptcy attorneys in your area who will answer your questions in FREE, NO OBLIGATION phone consultations. Our Service Representatives are here for you 24/7 to schedule your first free consult. Call now! 1-866-946-9466
First and foremost, be kind to yourself!
If you’re here for reasons other than reckless, compulsive spending, you’re not to blame. Likely, you could not have foreseen or prevented the event or reason that put you into this situation. You’ve already taken the first step (reading this article) towards getting back on your financial feet. Feel good about what you’re now doing and look forward to your fresh start.
If you are here because your credit cards seldom saw the inside of your wallet … well … learn the lesson of your past habits but move on. You can get your fresh start. Make the most of your new opportunity.
Filing for bankruptcy is a serious matter.
On the other hand, insolvency is an even more serious. We’ve done our best to make you aware of the negative aspects of Chapter 7. And we suggested alternative strategies to relieve your insolvency issues. You don’ want to pursue Chapter 7 until you’ve tried all the alternatives. But when everything else just doesn’t work, Chapter 7 can be your lifesaver.
You need to begin repairing your credit as soon as you receive your discharge order!
Chapter 7 replaces your insolvency problem with a credit problem. Chapter 7 stays on your credit record for 10 years. Oh, you will be able to get credit, including a credit card. But the terms will not be favorable, and the interest rate will be at or near the maximum allowed by law. That’s the real cost of a Chapter 7 bankruptcy.
However, there are things you can do to lessen the impact. You can make your credit look good in less than 10 years. You just need to know what to do and how to do it. Credit-yogi.com offers a wealth of free information and guidance to help you with the rebuilding process. We have helped thousands of people, post-bankruptcy, for nearly 18 years.
So, whether you are trying to avoid bankruptcy, pursuing bankruptcy, or recovering from bankruptcy…
Now is the time for smart decisions and even smarter moves! Calling us could be your smartest decision and best next move!
Our Service Reps are here for you 24/7. 1-866-964-8644